States Pass Budget Pain to Cities

States Pass Budget Pain to Cities

Cities and local governments would lose more than a half-billion dollars over two years.
By MICHAEL COOPER
Published: March 23, 2011

The state budget squeeze is fast becoming a city budget squeeze, as struggling states around the nation plan deep cuts in aid to cities and local governments that will almost certainly result in more service cuts, layoffs and local tax increases.
The cuts are widespread. Ohio plans to slash aid to Columbus, Cleveland, Cincinnati and other cities and local governments by more than a half-billion dollars over the next two years under the budget proposed last week by its new Republican governor, John R. Kasich. Nebraska passed a law this month eliminating direct state aid to Omaha and other municipalities. The governors of Wisconsin and Michigan have called for sending less money to Milwaukee, Detroit and other local governments.

And it is not only Republicans who are cutting aid to cities: Gov. Andrew M. Cuomo of New York, a Democrat, decided not to restore $302 million in aid to New York City that was cut last year, while Gov. Deval Patrick of Massachusetts, another Democrat, has called for cutting local aid to Boston and other cities by some $65 million.

Some mayors said the proposed cuts could force them to raise local property taxes, even as many homeowners complain that they are already overtaxed. Many are combing through their budgets, looking to wring out more savings where they can. Libraries may close. Garbage collection could be curtailed. Potholes might linger a bit longer. Some warned that they could be forced to lay off more city workers, including police officers and firefighters.

For cities like Cleveland, the proposed cuts in state aid mean that the light at the end of the budgetary tunnel is that much farther off.

“We weathered the storm pretty good when other cities were having huge layoffs, and eliminating or reducing services,” Mayor Frank G. Jackson of Cleveland said in an interview. “But the impact of this will force us into that mode.”

Mr. Jackson said the city had anticipated a reduction in state aid, estimating a 20 percent dip in its most recent budget. But Governor Kasich’s budget proposal would go even deeper: it calls for cutting aid to local governments by a quarter next year, and in half the year after that.

For Cleveland, Mr. Jackson said, that would translate into deficits of $16 million next year and $24 million, or 5 percent of the city’s operating budget, the following year. Having spent down the city’s reserves to get through the recession, and used up several one-time deals to balance its budgets, Cleveland will have to come up with more money or savings elsewhere.

Other cities in Ohio are struggling as well. In Akron, Mayor Donald L. Plusquellic said the cuts would erode the third-largest source of revenue for the city’s general fund. “I fear that, as a result of this reduction, Akron will have no choice but to once again look at layoffs in the biggest part of our budget: police and fire salaries,” he said in a statement.

The reductions in state aid, along with falling property tax revenues that are finally catching up with lower home values, are major sources of fiscal stress for many cities. Ben S. Bernanke, the Federal Reserve chairman, said in a speech this month that “many localities have been hard hit by reductions in state aid, which in 2008 accounted for about 30 percent of local revenues.” And Moody’s Investors Service, the ratings agency, said in a report last week that many states “are increasingly pushing down their problems to their local governments.” The Moody’s report warned that this would be “the toughest year for local governments since the economic downturn began.”

The cuts are a vivid illustration of a fact of fiscal life: budgetary pain flows downhill. Although state tax collections are finally improving again after the longest and deepest decline on record, they remain well below their prerecession levels. Stimulus money from Washington, which helped keep many states afloat over the last two years, is drying up. So states facing large deficits are proposing cuts in local aid. Ohio’s deficit is projected to be $8 billion over the course of its two-year budget — hence Governor Kasich’s proposed cuts.

Nebraska did not just reduce local aid, it eliminated it. Much less money was at stake — the law is estimated to save the state $22 million a year — but cities are nonetheless worried about the effects of the cuts. “This year, instead of cutting us all a certain percent, they went after the state aid totally, all 100 percent of it,” said Chris Beutler, the mayor of Lincoln. Mr. Beutler said that the cut would cost the city $1.8 million a year and force it to raise property taxes or cut services.

Direct aid represents only a fraction of the money flowing from states to local governments. When Mayor Michael R. Bloomberg of New York went to Albany last month, he said that by his count the budget Mr. Cuomo had proposed would reduce aid to the city by $2.1 billion, of which only around $300 million was in the form of direct municipal aid. The rest included a reduction of $1.4 billion to the city’s public schools, which in New York City are under the control of the mayor, and $380 million in cuts and cost shifts in social services. Mr. Bloomberg warned that the city would be forced to lay off more workers if the cuts went through.

Chris Hoene, the director of research for the National League of Cities, said that many states eliminated direct aid to cities — used to keep property taxes low, ease disparities among localities and help pay for general government services — after past recessions. Now, he said, most of the coming state cuts will be in the form of cuts to specific programs. Cuts to child health care, mental health programs, libraries or transportation will all have an impact on cities. On top of that, many states also have complex revenue-sharing programs with local governments, and a number of them are proposing to keep more of the money for themselves.

Mr. Hoene said the coming cuts were “a big, scary question mark” hanging over local governments. “Cities have made their estimates, and made cuts based on revenue projections,” he said. “The factor that they can’t control, and that’s concerning for them, is what’s going to happen in the deliberations in state legislatures over the next three months.”

Local aid cuts can be like squeezing a balloon: states reduce their spending and hold down their taxes, but cities can be forced to increase their spending and raise their taxes. That is one argument being made in Minnesota, where a new Democratic governor, Mark Dayton, has been fighting cuts to local aid proposed by Republican lawmakers. The governor said aid to Minnesota’s cities had dropped by 24 percent since 2003 — and that two-thirds of the cuts were passed on to local residents in the form of higher property taxes.

Many governors say they plan to give cities and local governments tools to balance their budgets, some by reducing costly state mandates, some by weakening union protections in their states, some by encouraging cities to consolidate duplicative services. Gov. Rick Snyder of Michigan, a Republican, is cutting aid to cities, villages and towns for a net savings of $92 million. But he said he would also make $200 million available to cities and towns that “adopt best practices.” Detroit and other hard-hit cities are worried about the proposal, though.

“No city in the state has taken such an aggressive approach to such serious structural problems as Detroit,” Mayor Dave Bing of Detroit said of the proposal in a recent speech. “Yet no city would be hit harder than us. It threatens the concrete but fragile gains we have made, and we simply cannot afford it.”